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When markets see severe declines as we have seen for nearly 10 days, shorts can make easy money but just as stocks get pushed too high by euphoric longs when things are good, shorts often push stocks well below fair value. These stocks have dropped to bargain-like levels, which makes them likely to snap back, especially on any good news. A couple of these stocks are potential takeover targets and all of them have other catalysts.
The stocks listed below have high short interest levels. Shorts make money by selling stock in companies they don't own (they "borrow" shares from their broker), with the hopes that they can buy the shares back for less and return the "borrowed" shares back to the broker and make a profit. One problem for shorts is when too many people short the same stock. When a stock is shorted to the point where it becomes an overcrowded trade, it can spark a short squeeze. A short squeeze is a great risk for shorts. A small jump in price and/or some good news being released by the company can spark panic buying by shorts who want to cover their shorts and cut potential losses before other shorts. Longs can profit from short squeezes, so sometimes it pays to invest in highly shorted stocks. With the markets in general having sold off to very oversold levels along with these stocks, it's just a matter of time before a sharp short covering rally is triggered in the stock market, so it makes sense to be prepared to profit from this. With the huge losses the markets have seen in the past 10 days, many analysts believe a a major snapback rally could happen at any time. Here are the companies that could see a short squeeze.
Chelsea Therapeutics (NASDAQ:CHTP) is trading around $4. CHTP is a biotechnology company based in North Carolina. These shares have traded in a range between $2.78 to $8.20 in the last 52 weeks. The 50-day moving average is $5.02 and the 200-day moving average is $5.06. According to the latest data on shortsqueeze.com/, there are about 4.9 million shares short. Based on average volume of just about 641,000 shares traded per day, it would take about 7.7 days' worth of volume to match the number of shares short.
LDK Solar (NYSE:LDK) is trading at $6. The 50-day moving average is $6.87 and the 200-day moving average is $10.37. LDK has very strong earnings for a stock trading around $6, and based on guidance from the company, it appears it could earn over $3 per share in 2011. This puts the PE ratio at about 2.5. According to the latest data on shortsqueeze.com/, there are about 32.4 million shares short. Based on average volume of just about 4.5 million shares traded per day, it would take about 7.2 days' worth of volume to match the number of shares short.
ATP Oil and Gas Corp. (ATPG) is trading at $10.88. ATPG is an independent oil and gas company based in Texas. These shares have traded in a range between $9.97 to $21.40 in the last 52 weeks. The 50-day moving average is $15.84 and the 200-day moving average is $16.55. The earnings estimates are for a loss of $1.38 per share in 2011, but analysts see profits of $1.86 per share for 2012. If ATPG achieves that level of profitability, these shares could jump to $30 in 2012. According to the latest data on shortsqueeze.com/, there are about 16.5 million shares short. Based on average volume of just about 900,000 shares traded per day, it would take about 18 days' worth of volume to match the number of shares short.
Mueller Water Products (NYSE:MWA) is trading at $2.22. Mueller Water Products makes and markets water infrastructure, flow control, and piping component systems for use in water distribution and water treatment facilities. These shares have a 52-week range of $2.16 and $4.80. The 50-day moving average is $3.68 and the 200-day moving average is $3.88, so these shares are trading well below support levels. Estimates for MWA are for a loss of 4 cents in 2011, and profits of 18 cents per share in 2012. Book value is stated at $2.60. This stock is heavily shorted and according to shortsqueeze.com/, there are about 11.3 million shares short. Based on average trading volume of about 786,000 shares per day, it would take about 14.3 days of trading volume for shorts to cover. This stock fell hard on heavy volume so it might be the capitulation day. This company is considering the sale of its U.S. Pipe division which would be very positive.
Central European Distribution Corp. (NASDAQ:CEDC) shares are trading at $6.53. CEDC is a leading beverage distribution company based in Pennsylvania. The 50-day moving average is $11.18 and the 200-day moving average is $17.21. Earnings estimates for CEDC are 78 cents per share in 2011 and $1.21 for 2012. Book value is stated at $22.19. According to the latest data According to the latest data shortsqueeze.com/ , there are about 7 million shares short. Based on average volume of just about 1.4 million shares traded per day, it would take about five days' worth of volume to match the number of shares short. Just weeks ago, CEDC stock and options saw a spike in activity on takeover chatter. There are a number of very large beverage companies looking to acquire beverage companies and this is only more likely with the shares trading at levels not seen in years.
Disclosure: I am long LDK, CEDC, CHTP, MWA, ATPG.
Source: 5 Dirt Cheap Stocks Poised for a Short Squeeze